M&A tax law has global precedents

Pranab Mukherjee is not the sole finance minister who frames and drafts laws that are applicable retrospectively. This is a standard practice across the world. And it’s not dictatorships or repressive regimes that enact such laws. Countries that serve as models of democratic governance — the US, the UK and Germany — are examples where laws have been enacted retrospectively.

In Budget 2012, Mukherjee has introduced a retrospective provision that makes it effective from 1962 — 50 years ago. The move, analysts say, is a direct fallout of the recent Supreme Court ruling that the UK-based telecom giant Vodafone wasn’t liable to pay $2 billion (Rs 11,000 crore), or about the size of what India spends on its mid-day meal scheme, in taxes.

“India is not a no-tax country,” Mukherjee told reporters. “It is not a low-tax country. If someone says I will not pay taxes, that will not be allowed. I cannot create a fiscal crisis.” Corporate India was annoyed and hinted that this law will hurt foreign direct investments into the country. But they need to look outside, including UK, the home of Vodafone.

“The amendments made by subsections (1) to (3) are treated as always having had effect,” says Section 58(4) of Chapter 9 in the Finance Act 2008. In plain English it means that the change pertaining to taxation of foreign partnerships would be effective retrospectively. This view has been held in the Court of Appeal. In the US, while retrospective lawmaking is not allowed in criminal cases, its Supreme Court has held that ex post facto cases would be permitted in civil matters, including taxation, Justice Samuel Chase ruled that “…the true construction of the prohibition (of framing post facto laws) extends to criminal, not to civil, cases.”

In Germany, retrospective laws have been sanctified by the Constitution. “…some national constitutions (for example that of Germany), endorse ‘retrospective’ criminal statues against acts that constitute a violation of international law,” wrote Chalres Sampford, a professor of law and ethics at Griffith University in his book Retrospectivity and the Rule of Law.

But when Germany attempted to tax a deal in the Netherlands and Denmark, the European court of Justice, in a June 30, 2011 judgment, rejected it.

“The principle of effectiveness precludes national legislation…which, retroactively and without any transitional period, does not permit the offsetting of foreign corporation tax,” the judgement said.

Philosophically and ethically, a retrospective law is considered regressive as it imparts subjectivity to its execution. “A lot will depend on how the laws are applied,” Centre for Policy Research president Pratap Bhanu Mehta said. “But the fear is less about legality and more about how the government will arbitrarily use it.”

In a world, where a government promise matters hugely in contractual transactions, it creates a position where the person’s investment is in danger and he becomes helpless and paralysed. “Changing laws retrospectively strikes at the foundation of the rule of law,” said economist Ajay Shah, professor at the National Institute for Public Finance and Policy. “It is a breach of faith for the firm to be told, many years later, that the law has changed.”